INFLATION

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Transcript of INFLATION

INFLATIONWhat is inflation?Sustained increase in the general price level of goods and services in an economy over a period of time.Causes of inflationDemand-Pull inflationCost Push InflationStrains of inflationMild InflationStrato-InflationHyperinflationMild inflationRise in GPI of <5% per annumLow unemploymentGrowing economy Factors Households, C & MBusinesses, I Government, G Foreign buyers, XStrato-inflationRise in GPI of 10% to a few hundred %Developing countriesHyperinflationMay lead to introduction of new currencyUsually short-lived High and unusual accelerating rates of inflationNominal income= Actual income Real income= inflation adjusted incomeNominal income CPI

Producers are able to raise their prices and achieve bigger profit margins because demand is running ahead of supply

More severe when SRAS is inelastic and there is full employment of resources Chriselda TanEleana TanLenet KongRaudhah David CaiBryan HuiDepreciation of local exchange rate Increases price of importsReduces price of country exportsImports , Exports Since AD= C+I+G+ (X-M)Therefore, AD

Higher demand from a fiscal stimulusIncreasing government consumption or transfers or lowering taxesMoney given to the citizens by the governmentWhen taxes ,Household disposable incomeConsumer spending & confidence in local economy Therefore, ADGovernment spending . Therefore, ADMonetary Stimulus to the economyWhen interest rates ,Demand for loansTherefore, ADso I Fast growth in other countriesExports to foreignersTherefore, ADWhen?Firms respond to rising costs, by increasing prices to protect their profit margins.

Why? Occurs when wages Firms will need to price of goods SRAS curve to shift upHence, GPL will If GPL remains, firms will have to wages again Effects of inflationInvestmentsOutput/EmploymentShoe leather costCost of time and effort spent trying to counter-act effects of inflation.Additional time & convenience sacrificed to keep less money on hand.Menu costEffects of deflationHigher rate of UnemploymentDecrease in InvestmentsGreater DebtSteady State CostsCosts that arise once the transition takes placeMenu CostsCosts to changing pricesInflation: Revised upDeflation: Revised downLoss of government revenue:Tax provisions are based on real incomesDeflation,Tax rates (even if no change to spending power)Therefore, government revenueCosts to monetary policyDeflation = Weak economyCase studyaka Runaway/galloping inflationImagine you are Japanese citizen and you are considering whether to set up your construction business in Singapore or Japan? One of the factors that influences your decision would be the inflation rates in both countries. Demand-pull inflationIn the past - Japanese government tried to combat its deflation by introducing currency intervention and monetary policy, such as by lowering nominal interest rates and increasing government spending. This caused an excess demand and caused the AD curve to shift to the right, causing an increase in the General Price Level (GPL)Currently - government has decided to increase its spending so as to lower the GPL. This in turn, results in a fast shifting of the AD to the leftCost-push inflationSingapore experiences cost-push inflation.A new policy where they want to restrict the number of foreign workersCause concerns that labour costs would riseHave become a contentious issue in the wealthy city-stateInflux of foreign workers has pressured the public transport systemAlso pushes up the cost of housing in recent yearsDifferent components have also increase in price; eg foodThe key idea they have is that companies need to put better technologies to use and pay low-paid workers betterThese rising labour costs and the rise in the different components will thus result in an inner shift of the SRAS, resulting in a contraction of national output and increase in General Price Level. What types of impacts have resulted from the inflation/deflation in each country?Which country is facing a bigger issue with inflation/deflation?Other higher order questions...WAGE PUSHIMPORTSOccurs when prices of import goods Cost of production Will cause SRAS curve to shift upHence, GPL will SUPPLY-SIDE SHOCKOccurs when an unexpected event that changes the supply of a product or commodityA sudden change in its price in input prices in cost of productionSRAS curve shifts Hence, GPL will DisinflationSlower inflation. The fall in the rate of inflation.DeflationOpposite of inflation. There are sustained or continual decreases in SRAS. Less products are supplied with same amount of money. 1. Stock prices ↓

2. Real return on investments ↓

3. Discouragement in investment

4. Bond prices ↓

COST-PUSH INFLATION=> OUTPUT decreasesDEMAND-PULL INFLATIONOUTPUTincreasesOUTPUT maximizedThe term comes from the fact that more walking is required to go to the bank and get cash and spend it, thus wearing out shoes more quicklythe costs of changing prices due to inflationFirms, such as restaurants have to change their menus to match the change in inflation which costs time and increases labour costs.